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Not a whole lot has changed over the course of the week since last weekend’s article and we closed this week about 50 points lower than last. In that article, I discussed my general thesis, and I pointed out some of the technical reasons I could see for a top being put in. And since then, some things have actually even improved, as we’ve had a breakdown of a structure that looks quite good for the bears for the time being.
I have been discussing that structure during the course of this last week. On Monday—the little stub day before the holiday—we could see a bull flag forming, and at the time, it looked like this:
At the time I posted that, I said it was an excellent place for a bull trap, and I had some expectations that the structure might fail, as—much like the February high—folks are a bit too bullish here in a bullish structure, and the market sometimes likes to disappoint a one-sided mood.
As of today, that bull flag looks like this:
This looks terrible now (wonderful if you’re a bear). This now looks like a failed breakout, followed by a rejection of a second attempt at a breakout.
So, from here, my expectations remain about what they have been. In Thursday’s article, I looked at a variety of ways we might count the structure, and
So, I think that’s a real possibility here, and it can take people by surprise. But, you will at least now know to remain open to that.
I don’t have a ton for this weekend, as I’ve made my case already over the last few weeks, and it’s time to sit tight and see how things play out from here. I do, however, want to revisit the Dow.
I last discussed the Dow here, and in that article, I suggested that it was unwise to draw any bullish assumptions about the structure yet. And I said it was an excellent opportunity for a failure. In that post, I looked at the inverse we can all see on the Dow, and at the time it looked like this:
At the time, we had this nice fake out over the neckline that got rejected. And, since then, since they love causing bears as much grief as possible, it broke out again, but has since simply been rejected again:
So, as it stands, there’s simply no sign yet that this inverse is breaking out and so no reason to be optimistic. And to the contrary, it’s failed twice to breakout, and this increases the chance that the structure may fail as a whole.
And we can also add this trend line (in orange) and you can see how awful it now looks:
This looks like a breakdown, backtest, fail. It looks great for bears, in my opinion.
And finally, let’s look the VIX. A few days ago, I pointed out an inverse we could see on it, and that played out. And now, we have this:
So, if those play out things might get pretty salty pretty quickly.
And that would be ironic and perfectly fitting given how we just hit a 52-week high water mark on sentiment this week:
And furthermore, despite first a pretty big gap down on Thursday followed by a very bearish close on Friday, the CBOE equity put-to-call ratio has fallen from 0.58, to 0.57, and now even to 0.52 on Friday:
Meaning, despite the failing bull flag, despite the strong selloff on Thursday, and despite the very ugly reversal on Friday, during this time, the appetite for puts has actually decreased. People are quickly abandoning bearish positions as the price action deteriorates.
So this continues to be an excellent setup for the bears.
I hope everyone has a lovely weekend, and we’ll see how things play out next week.